How do I allow a drop-down list parameter in SSRS to have a default value of "-- All -- "?

You are doing it right by returning the -- All -- option as part of the dataset that the query is based on.

You are getting the <Select a Value> message because, well, you haven't selected a value. What you need to do is assign the default value of -- All -- to this parameter. Open the parameter settings and click on the Default Values tab and enter the default value, which in this case is Null for -- All --.

I agree with Chris's answer however I would add that sometimes you want to add defaults to a multi value that are not all and not a single choice either. Generally I set two datasets up , each in a table variable for reporting. Similar to this:

'AvailableValues' Data set could be:

declare @Table Table ( personID int identity, person varchar(8));

insert into @Table values ('Brett'),('John'),('Peter');

select *
from @Table

'DefaultValues' Data set could be:

declare @Table Table ( personID int identity, person varchar(8));

insert into @Table values ('Brett'),('John');

select *
from @Table

If I set up a parameter and bind 'Available' values to a 'get values from a query' and choose my available dataset it has the first set. If I then choose 'Default' values and choose 'get values from a query' and choose the default I can select a subset as the default. The only issue is you must ensure your datasources in the second is a legitimate subset of the first.

You may also choose your Default from set one to get a list of all as well to choose all the values you specified.